The Yes Bank – Zee Case: Settling the Discomfort around Letters of Comfort

[Debayan Gangopadhyay and Rashmi Birmole are final and penultimate year B.A., LL.B. students respectively at ILS Law College, Pune]

Occasionally, a debtor’s residence in a different jurisdiction or lack of creditworthiness may attract concerns and reluctance on part of the creditor. What often follows is the need for additional credit support or a “quasi-security”. In this post, the authors deal with a specific type of credit support used extensively in such transactions – a letter of comfort (“LoC”) – and address the long-standing dilemma on its enforceability as a guarantee by examining an August 2020 decision of the Bombay High Court in Yes Bank Limited v. Zee Entertainment Enterprises Limited.

Before delving into the discussion surrounding the judgement, it is prudent to first understand the motivations behind issuing an LoC and its relevance in financing transactions at large. As the name suggests, an LoC is generally issued by a parent or a holding company to provide a degree of ‘comfort’ to the creditor by reinforcing the ability of a subsidiary or an affiliate to honour its obligations. LoCs are typically issued to avoid potential liability or on account of restrictions in charter documents. Such letters are usually motivated by the issuer’s intention to structure a transaction to be off its balance sheet for accounting purposes or due to the presence of financial covenants in other loan agreements limiting the borrowing powers and restraining the parent company from acting as a guarantor in future transactions. LoCs are known to be worded in a nebulous manner and some might even argue that they seek to offer a mere resemblance of ‘comfort’ to the creditor. This is simply because the enforceability of an LoC as a guarantee is a matter of construction, placing the creditor in an ironically uncomfortable situation.

Background to the Transaction

In 2016, Zee Entertainment Enterprises Limited invested in the equity of Veria International Limited through one of its subsidiaries – Living Entertainment Ltd. (“LELM”). There was a put option agreement signed between LELM and ATL Media Limited (“ATL”) – another subsidiary of the Zee group, wherein LELM was entitled to make ATL take up or buy 64.38% of Veria’s equity in LELM.

To finance the transaction, LELM sought a loan from Yes Bank, which financed the same in the amount of USD 50 Million. In addition to usual encumbrances, the put-option agreement between LELM and ATL also acted as a security to the loan, the rights under which were assigned to Yes Bank, exercisable on the occurrence of an event of default.  

Further, the arrangement of the put-option agreement in the loan was reiterated by an LoC issued by Zee to Yes Bank, assuring support for ATL “by infusing equity/debt” for honouring put options amongst other activities.  Other averments included holding at least 51% of shares of ATL during the tenure of the loan facility and the LoC to be an effective document “from the date of release of credit facilities” by Yes Bank to LELM till all dues are repaid to Yes Bank.

The dispute and claim for recovery started in 2019 when the promoters of Zee began selling their stake, which subsequently fell below 30%. This plunging of promoter shareholding constituted a defined ‘event of default’. Consequently, Yes Bank addressed a number of communications to ATL and LELM invoking the put-option, and to Zee for the enforcement of the LoC which mandated Zee to infuse funds into ATL and make it capable of enforcing the put-option. After a series of unsuccessful attempts, Yes Bank sent an ultimatum to Zee in March, 2020 claiming that the LoC was in the form of a guarantee and asking Zee to record this as a “accrued/contingent liability” in its books of records. Zee disputed its position as a guarantor in the loan arrangement and Yes Bank filed a plaint against Zee and its related subsidiaries. The prayers, however, pertained only to Zee and asked for it to be held as a guarantor and be made liable for direct repayment.

Decision of the Court

The decision mainly focused on whether the LoC can be treated as a guarantee of LELM’s loan on part of Zee. The Court rejected the plaint and answered the question in the negative. Firstly, it observed the conduct of Yes Bank in its communications, and noted that it never referred to the LoC as a guarantee until its ultimatum letter to Zee in March 2020. This was contradictory to its outright claim of the LoC amounting to a guarantee. Secondly, the Court deconstructed the entire arrangement and observed that the LoC only encapsulated that ATL had enough liquid assets during the period of the facility. The LoC only assured Yes Bank this aspect, and the arrangement of the put-option involving ATL and LELM was a separate transaction altogether. The Court held that the reliefs sought for by Yes Bank were completely misguided as Zee never owed any direct liability to Yes Bank.

The Court also carved out some crucial principles in relation to the interpretation of an LoC as a guarantee. It recognized the possibility of an LoC amounting to a guarantee in substance, provided it conforms to the provisions of section 126 of the Indian Contract Act, 1872. In terms of contractual interpretation, it held that in order for an LoC to be interpreted as a guarantee, it must be read in its entirety in a commercially reasonable manner and must depend on the exact terms under which the guarantor bound itself. Additionally, the Court warned against foisting liability beyond what the issuer has undertaken and stated that allegations of commercial infidelity and immorality shall not stand. It also noted conduct of the parties as an essential factor in the construction of LOCs.

Points for Consideration

In the subsequent paragraphs, the existing jurisprudence surrounding LoCs has been laid down with reference to the principles recognized and applied in the present case.

Statement of Policy

Representations made by an issuer in an LoC are directed towards utilizing the collective financial strength and status of the group of companies, to influence the lender’s credit decision. It is not uncommon for such letters to incorporate statements confirming the awareness of the transactions and indicating the issuer’s intention or policy to ensure that the affiliate is in a position to meet all its obligations and liabilities arising under the transaction. In the absence of express assurances to bind the issuer as a guarantor, such statements often come under scrutiny while determining the intention of the parties to enter into a legal relationship.

From an interpretational perspective, the question that tends to arise is whether such a ‘statement of policy’ is sufficiently promissory to bind the issuer as a guarantor. An attempt to answer this question was first made by the English Court of Appeal in Kleinwort Benson Ltd. v. Malaysia Mining Corporation,  where a similar statement was held to amount to a mere representation of fact or present practice, not a contractual promise as to future p:olicy. However, the judgement received a fair amount of criticism for basing its reasoning on the history and usage of words in comfort letters rather than the intent of the parties involved, and giving way to form over substance. In United Breweries (Holding) Ltd. v. Karnataka State Industrial Investment and Development Corporation Ltd., the Karnataka High Court found an LoC which stated the ‘normal practice’ of the issuer as only a “recommendatory letter”, holding that the issuer cannot be made liable for more than what he has undertaken. It is relevant to mention that such statements, if made in terms of future policy, do not restrain the creditor from bringing a claim for damages or specific performance against the issuer.

Substance over Form

One of the submissions made by Yes Bank stated that as the LoC in this case formed part of the security documents of the loan, Zee cannot absolve itself of all liabilities. Zee claimed that there was no privity and that the LoC was a mere letter and not a contract. The Court accepted Yes Bank’s submission stating that the form in which a guarantee is signed is immaterial and what matters is the substance. Rejecting Zee’s submission, it stated that the privity existed beyond a doubt because of the express wordings of the LoC.

In Intesa Sanpaolo v. Videocon Industries Ltd., an LoC was issued which was provided as security for a loan given by the bank. The sanction of the loan depended on the execution of the LoC. It was contended that the LoC was ‘merely a letter of comfort’ and not a letter of guarantee. The Bombay High Court, however, did not accept the argument and said that as the LoC formed a security document essential to the grant of the loan, its enforceability could not be questioned merely on the basis of its form or nomenclature. The Court made it sufficiently clear that an LoC is capable of functioning as a guarantee even if the document is in the form of a letter and ensures that the issuer does not undertake obligations in the nature of a guarantor, only to escape liability in the event of enforcement by the creditor.

The Banque Brussels Principle

The judgment of the New South Wales Supreme Court in Banque Brussels Lambert SA v. Australian National Industries Ltd. [(1989) 21 NSWLR 502] laid down certain principles to adjudicate whether an LoC gives rise to contractual obligations. Following is the excerpt which categorically states the principles:

“1. In determining whether a letter of comfort gives rise to contractual obligations;

(a) the ordinary rules of construction and interpretation relating to contracts apply;

(b) the overriding test is that of the intention of the parties as deduced from the document as a whole, seen against the background of the practices of the particular trade or industry and in the events surrounding its inception;

(c) the prima facie presumption that in respect of commercial transactions there is an intention to create legal relations applies, and the onus of proving the absence of such intention rests with the party who asserts that no legal effect is intended.

2 . In the circumstances, and taking into account the negotiations leading to the final version of the letter of comfort, and a close textual analysis of its terms, the letter of comfort contained 2 enforceable contractual promises, breach of which gave rise to a liability in damages where the shares ….. were sold without the plaintiff being given 90 days’ notice.”

It also criticized the view taken in Kleinwort Benson and categorized its interpretation as unnecessarily technical and “commercially unrealistic”. It advocated for a commercial transaction to take its due course as mutually decided. It stated that contracts entered into with full knowledge of its consequences should not be later found to be of no consequence and be allowed to exist in a twilight zone of honorary arrangements. With respect to the guidelines, the Court firstly said that the ordinary rules of constructions and interpretations relating to contracts would apply. It further said that the intention of the parties deducible from documents and events surrounding its inception seen with the context of existing practices of the industry would be the overriding factor. Lastly, the Court stated that the prima facie presumption would always be in favour of intention of the parties and it would be the burden of the party claiming no legal effect to disprove the presumption. This aspect was borrowed from the dictum of Edwards v Skyways Ltd.

The Banque Brussels principles were considered in the decision of Lucent Technologies v. ICICI Bank Ltd.;however, the Delhi High Court decided against the bank and found the letter lacking the required assent for binding contractual obligations. The principles and guidelines were also considered in the present judgment, but the Court while observing the critique of Kleinwort Benson as narrow held in as much as it is true that a transaction should not be held back to run its due course because of technicalities. It is also true that the interpretation should be as per its plain-terms and intent. A contract cannot be held for anything more than what was provided for. The Court held that the LoC only mandated Zee to enable sufficiency of ATL to honour the put-option but had nothing to do with the put-option arrangement itself. The Court, while setting out its own guidelines, merged a few of the Banque Brussels guidelines and laid down valid limitations to safeguard the issuer against an overbroad interpretation of the LoC by the Court.


The classification of obligations arising under an LoC and its enforcement as a guarantee has always remained a contentious issue in commercial transactions based on credit financing. LoCs generally do not subscribe to a standard format resulting in an inspection into the terms, language and surrounding circumstances to ascertain the intention of the parties. In the authors’ opinion, the decision in Yes Bank Limited v. Zee Entertainment Enterprises Limited is instrumental in settling general guidelines for prospective creditors and parent companies on the treatment of an issuer as a surety under an LoC, a question which has previously been discussed only in a limited factual matrix. The decision has recognized a valid possibility of an LoC being enforced as a guarantee on the fulfilment of certain conditions, diverging from the commonly held belief of an LoC being a ‘toothless security’. The decision is especially crucial to issuers looking to avoid the imposition of unplanned liabilities and to creditors assessing avenues to ensure repayment, and offers direction on the issues that shall now be considered in prior contractual negotiations and drafting. The judgment has also merged a number of guidelines as was issued in Banque Brussels (which has been cited multiple times in similar cases involving enforceability of LoCs) and gives recognition to it in Indian law to some extent. Lastly, the judgment shows the importance of relief sought for at the time of legal action and how it is heavily essential to have it consistent with the language of the original document.

Debayan Gangopadhyay & Rashmi Birmole

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